GCAP General Education Midterm Practice Exam

The terminal multiple method is a valuation approach used to estimate the terminal value of a business at the end of a specific projection period. This method relies on applying a multiple, often derived from comparable company analysis (peer group multiples), to a financial metric from the final projected year, such as EBITDA, earnings, or revenue.

By utilizing a peer group, the valuation considers how similar businesses are valued in the market, which helps to ensure that the terminal value reflects current market conditions and investor sentiment. This approach is straightforward and useful when there are ample comparable companies to derive meaningful multiples.

In contrast, the discounted cash flow method focuses on projecting future cash flows and discounting them back to their present value, while net present value analysis is used for evaluating profitability by comparing the present value of cash inflows with outflows. The final year EBITDA multiple is indeed a component of the terminal multiple calculation, but it is not the complete method itself. Thus, the terminal multiple method incorporates peer group multiples and wraps them into a comprehensive valuation framework.